June 15, 1999

                   Overfunded Pension Plans
                   Fatten Companies' Earnings

                   By ELLEN E. SCHULTZ
                   Staff Reporter of THE WALL STREET JOURNAL

                   Shareholders of General Electric Co. were pleased to see it turn in another
                   banner year in 1998, with strong contributions to earnings from many
                   different parts of the company. That includes one part they might not have
                   thought of: its pension plan.

                   Of GE's 1998 pretax profit of $13.8 billion, its pension plan provided
                   more than $1 billion.

                                        Pension plans as a boon to the bottom line?
                                        Those same pension plans that used to be a
                                        financial burden for many companies, and
                   were so often underfunded? Yes, and not just at GE but at many other big
                   American companies, too.

                   Chalk up one more minor miracle for the amazing 1990s bull market.

                   Like many pension plans, GE's has grown fat as the stock market in which
                   it is heavily invested has rolled on. It is overfunded, far in surplus. GE
                   couldn't withdraw this surplus without paying a stiff excise tax, enacted in
                   1990 to put a stop to the pension raids of the 1980s.

                                        Pension Payoff
                   Large pension surpluses can generate 'pension credits' that flow to the
                   companies' income statements, boosting earnings. These are the U.S.
                   companies with the largest pension surpluses. Figures are for fiscal 1998,
                   in millions.

                                                                  to income
                   General Electric
                   Bell Atlantic-a
                   Lucent Technologies-a
                   SBC Communications-a
                   U S West-a
                   Lockheed Martin

                   a-Cash balance or similar hybrid plan, by year-end.
                   b-Company did not take a pension credit in 1998, but used $2 billion in surplus for
                   severance benefits.
                   Source: company filings

                   But thanks to an accounting rule that is little known to either shareholders
                   or analysts, and that was written for a very different era, there is a way to
                   gain from the pension surplus. The rule provides that if investment returns
                   on pension assets exceed the pension plans' current costs, a company can
                   report the excess as a credit on its income statement. Voila: higher

                   Getting Credit

                   It's happening at a lot of companies, and the amounts are substantial. Bell
                   Atlantic Corp.'s pension plan produced a $627 million pretax credit for the
                   company's 1998 income statement. GTE Corp. reaped a $473 million
                   pretax credit. Caterpillar Inc. scored a $183 million credit.

                   At Northrop Grumman Corp., 40% of first-quarter pretax profit was
                   attributable to the overfunding of the pension plan. USX-US Steel Group
                   would have reported a first-quarter loss except for its overfunded

                   One might think that for employees, the overfunding of plans would be
                   good news; there would be at least a chance that the company would
                   improve their benefits. But in fact, the incentives for companies are quite
                   different. If a small pension surplus is a boon to the bottom line, a bigger
                   surplus is an even bigger boon.

                   And one way to make the surplus bigger is to reduce benefits.

                   Indeed, while no company ever cites profits as a reason for a pension
                   switch, many companies with overfunded pension plans are changing their
                   plans, frequently with the result that future benefits become less generous.
                   Next month, for instance, International Business Machines Corp. will
                   convert its overfunded pension plan to a variety that will provide lesser
                   benefits for many older workers -- and that will render the plan even more

                   "It's important to know that we're not making this change to save money,"
                   IBM told employees on a Web site. But after IBM makes the change, the
                   pension credit the company records on its income statement is expected to
                   jump by $200 million, to roughly $654 million for 1999.

                   Genesis in '80s

                   How did this party get started? The roots lie in an accounting rule change,
                   which took effect for large employers in 1987 and smaller companies a
                   little later. The Financial Accounting Standards Board was concerned that
                   corporations weren't reporting their pension obligations in a uniform way. It
                   required companies to start recognizing them on their income statements by
                   recording a liability. With much grumbling, companies complied.

                   But soon, the unexpected happened. The stock market started moving
                   relentlessly upward. And the pension funds' managers shifted more of their
                   assets into stocks, raising the share from less than half to about 60% today.
                   Assets in the plans mushroomed.

                   Liabilities didn't keep pace. Many companies were shrinking both their
                   work forces and their pension benefits. The result was the birth of some
                   gargantuan pension-plan surpluses. The 10 U.S. corporate pension plans
                   with the largest surpluses have combined surpluses of more than $100

                   The pension-fund surpluses are proving valuable to companies in other
                   ways. For one thing, they can be spent on employee-related costs that
                   companies otherwise would have to pay from cash flow, such as disability
                   benefits, certain profit-sharing contributions or part of the cost of top
                   executives' benefits. DuPont Co., for instance, uses about $250 million a
                   year of its pension-fund surpluses to pay for retiree health costs.

                   And companies can use the money in overfunded pension plans to pay for
                   staff "downsizings," as AT&T Corp. did last year. When 15,300 of its
                   managers accepted a buyout package, AT&T used $2 billion of
                   pension-plan surpluses to pay for the packages. An added tax break kicks
                   in when this happens: The money is exempt from Social Security and
                   Medicare payroll tax, saving employers and employees about 7.65% each.

                   "For years, people saw the pension as this bucket of money you can't
                   touch," says Thomas Henritze, director of benefits accounting at US West
                   Inc., which had $101 million in pension credits in 1998, and, in addition,
                   was able to use $55 million in pension surplus to pay for retiree medical
                   costs. "Companies are looking to not leave the asset dormant, but use it to
                   deliver better returns for the company."

                   For certain companies, such as those deep in debt or involved in
                   acquisitions, the 1980s strategy of terminating a pension plan and mining its
                   assets can still be alluring, partly because they can dodge a lot of the excise
                   tax. However, most companies now are content to let the pension-plan
                   surpluses pile up.

                   Indeed, so valuable are large, overfunded pension plans to companies that
                   employer groups are lobbying for ways to get more money into them.
                   Current law doesn't let companies deduct contributions to pension plans
                   once the level of assets reaches 150% of the plans' liabilities, with the result
                   that many corporations are on a contribution holiday. GE hasn't
                   contributed to its pension plan since 1987 (although employees are
                   required to contribute; they put in $112 million last year).

                   Employers have already successfully lobbied to get the ceiling gradually
                   raised in coming years, and Wednesday the House Ways and Means
                   Committee is expected to consider a proposal to raise it still further.
                   Another bill would pave the way for companies to contribute more to their
                   pension plans on behalf of high-paid employees; currently, such
                   contributions aren't deductible on salaries beyond $160,000 a year.

                   Adding Employee Money

                   Employers also are looking for ways to feed more employee money into
                   already-overstuffed pension plans. That even includes employees' 401(k)
                   money, such as happened when NationsBank and BankAmerica merged.

                   At BankAmerica's invitation, NationsBank employees transferred $1.4
                   billion of their 401(k) money into the BankAmerica pension plan. That
                   nearly tripled the pension plan's surplus, to $1.3 billion. The transfer helped
                   produce a pension credit for the merged company, called Bank of America
                   Corp., says Chuck Loring, a senior vice president. "To the extent that we
                   have pension income instead of pension costs, it improves our earnings," he

                   Still, the more common way to beef up pension assets is to reduce
                   benefits. GE, it should be noted, hasn't done so; in fact, prodded by its
                   unions, it has sometimes improved pension benefits. But many companies
                   are converting their pension plans to what are called cash-balance plans,
                   which can reduce benefits for older employees who otherwise would have
                   seen their pension credits build up rapidly in their last working years. In
                   cash-balance plans, each employee has a theoretical pension balance, to
                   which the company makes an annual donation and which the company
                   treats as growing by a fixed percentage each year.

                   And by cutting that fixed percentage, some companies with cash-balance
                   plans further cut pension liabilities. For instance, AT&T will slash to 4%
                   from 7% the gain it credits annually to employees' pension balances,
                   starting after 2001.

                   IBM's Surplus

                   Switching to cash-balance plans has fattened many pension-plan surpluses.
                   Of the 12 pension plans with the largest surpluses, 10 are
                   cash-balance-type plans or will be by year end. It is such a switch that is
                   expected to bestow the extra $200 million in credits on IBM's income
                   statement this year.

                   In the past, moves that reduced pension benefits often were resisted by top
                   executives, because they didn't want their own pensions cut. But now, they
                   have so-called top-hat plans that make up the difference. For example,
                   proxy statements show that after Banc One Corp. and Dana Corp.
                   converted to cash-balance plans, supplemental executive retirement plans
                   were revised to make sure top managers got the better benefit available in
                   the old system.

                   In addition, since executive compensation increasingly is tied to corporate
                   earnings targets, pension surpluses that boost a company's bottom line can
                   boost what top managers earn, too.

                   Retirees' Complaint

                   Pension-plan overfunding has not, however, prompted companies to give
                   more benefit increases to retirees -- quite the reverse. In the early 1980s,
                   60% of large companies provided regular cost-of-living increases for
                   pensioned retirees; today, with the plans in better financial shape, fewer
                   than 4% do. GE last did so in 1996.

                   At GE's April shareholders' meeting in Cleveland, Chairman John F.
                   Welch autographed annual reports for pleased investors. "You've made me
                   rich," one woman told him. But about 100 retirees made a plea for an
                   increase in their pensions, noting that GE's $43 billion pension plan
                   currently is overfunded by $15.9 billion, the biggest surplus in corporate

                   Helen Quirini of Schenectady, N.Y., who is 79 years old and worked at
                   GE for 39 years, spoke up. She retired in 1980 and doesn't recall her final
                   pay level, but she said that her pension is $576 a month. "Our pension fund
                   has a huge surplus, and it is a shame that such pitiful pensions are still being
                   paid to earlier retirees," Ms. Quirini said.

                   The retirees, without being specific in their request, asked shareholders not
                   to approve a proposed increase in pensions for GE directors without also
                   giving one to retirees. Mr. Welch replied that market fluctuations might
                   reduce the pension plan's assets, so it would be risky for the company to
                   provide the many retirees an increase.

                   Shareholders approved a 50% increase for directors with five years'
                   service, raising their pensions to $75,000 annually.